Source: ET
Context:
From 1 April, India will overhaul its deposit insurance premium framework, moving from a flat-rate system to a risk-based pricing model.
The reform was announced by the Reserve Bank of India and will be implemented by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
What was the earlier system?
- In place since 1962
- Flat premium rate for all banks, irrespective of risk
- Current rate:
- 12 paise per ₹100 of assessable deposits
- Advantage:
- Simple and uniform
- Limitation:
- Did not differentiate between well-managed and weak banks
- Created no incentive for prudent risk management
What is changing now?
1. Risk-based premium framework
Banks’ deposit insurance premiums will now depend on:
- Capital adequacy
- Asset quality
- Earnings
- Liquidity
- Supervisory assessment
- Potential loss their failure could impose on the insurance fund
Stronger banks pay lower premiums, riskier banks pay higher premiums.
2. Two risk assessment models
- Tier-1 model
- For scheduled commercial banks
- Excludes Regional Rural Banks (RRBs)
- Tier-2 model
- For RRBs and cooperative banks
3. Caps on premium variation
- Risk-based adjustment capped at ±33.33% of the base (“card”) rate
- Prevents:
- Excessive burden on weaker banks
- Abrupt shocks to the banking system
4. Vintage incentive
- Additional incentive of up to 25% reduction
- For banks with:
- Long contribution history
- No major claim payouts
- Final premium = Card rate ± risk incentive ± vintage incentive
5. Special treatment of certain banks
- Payments banks & local area banks
- Continue to pay flat card rate
- Reason: limited data availability
- Urban Cooperative Banks (UCBs)
- Under supervisory or corrective action:
- Brought into new framework only after exiting restrictions
- Under supervisory or corrective action:
